FIBAC 2019

Saurabh Tripathi, MD and Senior Partner

Indian Banking in next 5 years: Supporting credit for a $ 5Tn Economy while navigating a complex disruption

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To attract capital to support credit for a USD 5 Tn

economy, policy needs to proactively reinforce

non bank ecosystem, encourage faster bank

consolidation, and push rapid digitization of

legacy banks and introduction of new banks

India poised to be world's poster child for

disruption in banking in coming years – non bank

ecosystem to become very prominent

Key

messages

3High demand on banks to invest in capabilities

across the board – weaker banks set to be

rapidly marginalized creating disruption in flow

of credit, especially to commercial sector

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NBFC already have dominant reach in retail and small business credit and are core to market development

14%

31%42%

30%

19%

19%

42%32%

49%

8%

Tier 3&4Tier 1&2

8% 7%

Tier 5&6

NBFCs

Private

PSU

Note: 1. Data for number of new loans sanctioned in FY19 2. NTC means New to Credit 3. NBFCs includes HFCs 4. Products included are Auto Loans, Personal Loans, Housing Loans, Consumer Loans, Business loans, Loan Against Property, Gold Loan, Credit cards, Agri-Priority, Commercial Vehicle and Construction Equipment Loans 5. Others include Co-operative Banks, MNCs and Regional Rural BanksSource: TransUnion CIBIL; BCG Analysis

Total no. of new loans (FY19)

14%18%

31% 20%19%

60% 55%

Tier 3&4

8%

57%

7%5%

Tier 1&2

6%

Tier 5&6

NBFCs

PSU

Private

Total no. of loans to NTC1 (FY19)

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Indian banking poised for significant disruption

1. Internet transactions include RTGS, ECS, NEFT and IMPS financial transactions 2. ATM/CDM includes withdrawals transactions at ATM and deposit transactions at CDMs. ATM and Mobile transactions included are financial transactions onlySource: RBI data, BCG Analysis

Number of transactions (billions)

14%

20%

59%

273

2%4%

FY22-25

31%

20%

12% 17%

9%

0%

FY17

18%

11%

6%

2%

43%

13%

10%1%

19

4%5%

FY19

32

UPI

Mobile & internet

POS

NACH

NEFT

ATM

Cheque

Cash

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Indian banking poised for significant disruption

1. Internet transactions include RTGS, ECS, NEFT and IMPS financial transactions 2. ATM/CDM includes withdrawals transactions at ATM and deposit transactions at CDMs. ATM and Mobile transactions included are financial transactions onlySource: RBI data, BCG Analysis

Number of transactions (billions)

UPI

Mobile & internet

POS

NACH

NEFT

ATM

Cheque

Cash

31%

20%

17%

18%

9%

12%0%

11%2%

43%

6%

FY17

13%

10%1%

4%

32

5%

FY19

19

29%

36%

25%

10%

FY19

Share of UPI Transactions

All banks, other PSPs

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10

0

40

20

30

2010

Offline consumption (Tn, RMB)

20132009 2011 2012 2014 2015 2016 2017 2018

China has already witnessed such rapid transformation

Source: National Bureau of Statistics; iResearch; BCG Analysis

44% Bank card

& Cash

56%Mobile

Payment

Non banks

share

FY18

90%

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What does the future hold?

Transaction costs will dramatically reduce, as digital

infrastructure becomes even more robust

Customer experience will rule, as cashbacks/offers

phase out—fintech and bigtech will have edge vs banks

Current merchant model will be disrupted—smartphones

on both sides (using QR code) will replace cards

Market will consolidate around a few winners—ability to

monetize customer base will be key

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Industry will move further towards horizontal stacks

Source: “Will Industry Stacks Be the New Blueprint for Banking?” BCG Perspectives

Integrated Players

Customer

Interface

Products and

services

Infrastructure

Horizontal Stacks

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Customer

interface

Products and

services

Infrastructure

Source: “Will Industry Stacks Be the New Blueprint for Banking?” BCG Perspectives

Consent base data sharing – major ecosystem of non banks to emerge around banks

Authentication

& KYC

DataBureauPayment

Infrastructure

Banks

Banks

• Physical

• Digital

• Call center

• Branches

• ATMs

• Core Banking

Platform

Payments

Payments

NBFC

Transaction Data

Personal Finance

and Wealth mgmt.

Transaction Data

Ecosystem

platform

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Retail Loans: Capabilities of Industry evident; Quality strengthened as growth slowed

Note: 1. NBFCs includes HFCs 2. Industry includes NBFCs, HFCs, Private banks, Public sector banks, Co-operative Banks, MNCs and Regional Rural Banks 3. Retail Consumer loans include Auto Loans, Credit card, Gold Loan, Personal Loans, Housing Loans and Consumer Durable LoansSource: TransUnion CIBIL; BCG analysis

Advances growth slowed … Industry tightened standards

Inc/Dec25%

FY19FY18

Yoy (%)

16%

42% 46%

41% 39%

14% 13%

3% 2%

FY18 FY19

-1 650-750Below 650 750+

Credit scores

GNPA (%) FY18 FY19

NBFCs 2.3% 2.5%

Private

Banks2.7% 2.5%

PSU Banks 4.0% 3.0%

Industry 3.2% 2.8%

… but quality of book improved

Bureau score of new loans

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Inability to manage quality hinders supply of credit in SME

Note: 1. NBFCs includes HFCs 2. Industry includes NBFCs, HFCs, Private banks, Public sector banks, Co-operative Banks, MNCs and Regional Rural Banks 3. Products included are Retail Business loans, Retail- Loan Against Property, Retail - Commercial Vehicle & Construction Equipment Loans and SME business includes loans < INR 50 croresSource: TransUnion CIBIL; BCG analysis

Industry could not tighten

standards

Significant variation in growth dip-

Advances growth-YoY (%)

FY18 FY19

31% 23%

27%42%

17%

-1%

33% 33%

44% 44%

17% 15%

7%

FY18

7%

FY19

-1 Below 650 650-750 750+

Credit scores

Bureau score of new loans

NBFCs

Private Banks

PSU Banks

Visible build up of stress-

NPA (%)

NBFCs

Private New

Private Old

PSU Large

PSU Medium

Industry

FY18 FY19

5.1% 7.3%

2.5% 2.2%

5.4% 7.9%

19.6% 19.1%

20.4% 24.5%

11.3% 11.3%

Inc/Dec

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Major investment needed to upgrade SME credit process in the industry towards best use of data and digitization

#1 #5#2 #4#3

Level of MSME lending digital maturity in surveyed

Banks/NBFC

1. Remaining 42% of NTC borrowers are serviced by other lending organizations like RRBs (13%), cooperatives (8%), foreign banks (5%) and others (16%) 2. % of MSME lending book as on Dec 2018 3. 7% of MSME loan book resides with all other lenders (including fintechs)Source: BCG-Omidyar network Report: “Credit disrupted: Digital MSME Lending in India”, Transunion CIBIL MSME Pulse Apr 2019, Survey conducted on 21 FIs to assess MSMElending digitization

Player (#) #1 #2 #3 #4#1 #2 #3 #5#3#2#1 #4

Public sector banks Private old banks NBFCs New Private Sector banks

High Medium Low

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We conducted an exhaustive study of the MSME lending process value chain in a sample of FI

MSME lending journey for each FI assessed across—

Extent of digitization across the journey(e.g., manual steps vs automated steps)

Extent of credit bureau data usage across the value

chain (e.g., sourcing, underwriting, monitoring)

Extent of use of analytics/analytical models(e.g., Early warning signals)

Extent of use of alternate data in underwriting(e.g., surrogate data such as legal data, social media data)

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Next gen tech will give humungous edge to adoptersJobs that will not be needed due

to AI applications (%)Efficiency increase in

remaining jobs(%)

Insurance

Capital

markets

Sources: BCG Model for the Impact of AI on the Employment Market in the Financial Sector by 2027; WIND; National Bureau of Statistics; China Banking Regulatory Commission; Insurance Association of China; China Securities Industry Association

Banking 22% 42%

25% 29%

16% 56%

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Digital leaders enjoy stronger financials—Example: SA growth driven by debit at POS transactions

Note: 1. Data of 6 PSU—Large banks, 13 PSU—Medium banks, 4 Private—New banks and 8 Private—Old banks included for the purpose of this analysisSource: RBI data; Capitaline data; BCG analysis

500 3010 20 40 1000

5

10

15

20

Accounts that use debit cards at POS (%)

SA Deposit growth (%)

PSU Private

R2 =0. 51

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Market shares are shifting faster - Banks with better digital capabilities at advantage

10%18% 16%

19%

25% 25%

22%

55%47%55%

2%0%2%

FY05-09

2%2%

FY09-14 FY14-19

PSU-Large

PSU-Medium

Private New-Large

Private New-Small

Private Old

Note: For the purpose of analysis we have considered 6 PSU—Large, 16 PSU—Medium, 3 Private New—Large, 5 Private New-Small and 6 Private old banksSource: IBA data

Market share for additional Savings Account Deposit (%)

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Indian Banks need significant investment to up their game on digital capabilities—Example digital sales

Source: BCG India Digital Capability Diagnostic; BCG Global Diagnostic

5048

3025

23 2320 19

1714 13 13 12 10

8 7 6 6 6 4 3

Bank 4Global

Best

Banks

Bank 7 Bank 18Bank 5 Bank 9Bank 1 Bank 2 Bank 6 Bank 15Bank 12Bank 3 Bank 8 Bank 10 Bank 11 Bank 20Bank 13 Bank 19Bank 14 Bank 16 Bank 17 Bank 21

70-75

Mobile Banking—Digital Sales Capability Score

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Gaps in performance are widening

-1.5-1.8

0

2

-0.4

0.6

-0.1

0.3

-0.4

0.0

-0.6

-0.2PSU Large

PSU Medium

1

2

0.7

1.61.8

0.8

FY2016

0.4

FY2015

1.4

0.3

FY2017

1.1

FY2018

1.1

0.4

FY2019

Private New

Private Old

ROA (%)

Source: RBI data; Annual reports; Investor Presentations; BCG analysis

40

40

60

46

Rs. Lacs

42

27

FY2018FY2015

Private-Old28

FY2016

50

3733

FY2017

52

35

55

FY2019

Private-New

Revenue/employees

35

45 43

40

PSU-Medium

Rs. Lacs

33

30

34

30

39

3233

35

PSU-Large

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Further marginalization of weaker institutions imminent

Compete with

BigTech/FinTech

1

Erosion of

Franchise

Weaker Institutions

Scale

Disadvantage

Low investment in

technology and poor talent

2

33

4

5

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Encourage banks to adopt differentiated models

Source: BCG analysisIn-house Partner

Customer interface

Products and

services

Infrastructure

Key success factors

Digitised full

service bank

1

Scale and capability

across value chain

Specialised

vertical play

2

Focused set of products

end-to-end

Banking as a

service/open bank

3

Account keeping at

lowest possible cost/

product excellence

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Review bank licensing policy to attract new capital

China

3 new internet banks licenses

2 new virtual bank licenses

Korea

Australia

Authorized deposit license

for challenger/new bank

Hong Kong

8 new virtual bank license

to JV/Tech Companies

Taiwan

2 new digital bank

license proposed

Singapore

• 2 new digital full bank

• 3 new digital bank wholesale

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Implications for policy and regulations

Expedite consolidation

Encourage digital transformation

Profitability of banking and non banking sector to attract fresh capital

Encourage differentiated business models

Support growth of vibrant (and stable) non banks ecosystem

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Strengthen non bank ecosystem – especially the NBFC

Higher transparency in market disclosures — portfolio quality, funding

sources

Differentiate prudential liquidity norms in line with maturity profile of assets

Facilitate flow of long term credit from insurance and pension funds with

introduction of innovation in debt market instruments like covered bonds

Create a refinance and liquidity support institution for NBFCs engaged in SME

finance

Bank lending to NBFC customized to NBFC requirements

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